The Real Estate Whisperer shares truths about the real estate market, straight from the front lines.

Tuesday, June 22, 2010

The Four Cs of Lending

If you've recently gotten engaged or married, you probably can recite the principles you learned about the "4-Cs" as it relates to diamonds... and yet, when it comes to learning about the "4-Cs of Lending", most people pay far too little attention. Well, if you're thinking about refinancing or buying a new home, this post is for you....

The 4-Cs of Lending:

Capacity- Do you have the ability to pay back the loan? Here lenders look at your income and debts.

Credit/Character - Do you have a record of paying back your other debts on time? This is where your credit report comes into play.

Collateral - Whatcha got? With mortgages and home loans, this is the house that you'll be using to secure the loan. With a car loan, the car is your collateral; with a secured credit card, you may have money in the bank that is used as collateral - it is whatever you're promising to give the bank if you don't pay your loan back as agreed. With home loans, lenders look at the condition and value of the property and it's use...and value to you. Primary homes are better collateral to a lender than an investment property - let's face it, we're all more likely to pay for the "roof over our head" than a place that we own but never personally use.

Cash - Never under estimate the value of cash. With home loans, lenders look not only at your "reserves" (the money you have available to you should you get into financial trouble), but also the equity you have in your home (if you're refinancing) or the amount of your downpayment (if you're buying). They want to make sure you have "skin in the game" - that if you lose the home to foreclosure, you are losing your own cash, too.

Take a look at this great chart which shows how lenders review loan applications and see how you rate - JUST CLICK HERE. This chart comes to us courtesy of: